Yield Curve Inversions And Recessions

This article continues the previous discussion of bank net interest margins. In it, I discussed how changes in the yield curve changed the net interest margin (NIM) for banks. This showed up historically — when bank balance sheets were shattered by the combination of holding long-dated mortgages with low fixed coupons versus having a sky-high short-term rate imposed by deranged Monetarists. In this article, I address a common macroeconomic story: yield curve inversions cause recessions by the alleged effect on NIM. As a spoiler, I do not think that story holds water in “modern” banking systems.

The Yield Curve And Bank Net Interest Margins

One of the topics that comes up whenever government bond curves re-price is the relationship between the yield curve and bank net interest margins (NIM). This then morphs into a second question: does a yield curve inversion cause a recession by the (alleged) effect of the yield curve on bank interest margins, reducing the willingness of banks to lend?

Crypto Failures Versus Bank Failures

The ongoing collapse in cryptocurrency exchanges is attracting attention and schadenfreude. As an uninterested outside observer, all I can say is that weak exchanges are being culled, whether any “strong” ones will be left remains to be determined. My guess is that unless regulators step in and shutter them, inflows from elsewhere should be able to prop up some exchanges. The problem for crypto bulls is that the ongoing liquidation process will put coin prices under pressure.

Podcast

I was invited onto the MMT Podcast with Patricia Pino and Christian Reilly (thanks!): “What Is A Bond Vigilante And How Do We Get Rid Of Them?” A discussion of some of the issues raised by the wackiness in the U.K. bond market. Obviously not a current event, but a discussion of what we can learn.

Random Comments 2022-11-11

A set of largely unconnected comments on recent events. None of them necessitate long form treatment.

Primer: Bank Capital

Bank capital is the buffer on a bank’s balance sheet that allows it to absorb losses, particularly credit losses. Although there is a great deal of excitement about bank liquidity — bank runs, just like in “It’s a Wonderful Life”! — but the main danger is the capital buffer being wiped out (insolvency). A bank run might feature at the end of the bank’s lifetime (quite often, regulators just step in), but the trigger is the insolvency. This article discusses bank capital at a high level, from a macroeconomic viewpoint.

Social Media Discontents

I have been fascinated by the clown car crashing into a dumpster fire that Twitter has seen since the Elon Musk takeover. Although one of my character weaknesses is finding enjoyment from management meltdowns, there was a mixture of alarm since my genius engagement strategy was to largely rely on Twitter. However, some of the more worrying developments was disinformation spread on Twitter (lol), and I do not see any immediate need for radical shifts on my part.

(Note: anyone interested in technical discussions can skip this post. This is just explaining my thinking about my content delivery.)

Bank Liquidity Management Introduction

For modern financial systems, the key distinguishing characteristic of banks is that they key managers of the liquidity of the system. Although one can find small banks (or community banks) that operate on more traditional lines, banking firms are diversified and operate in the capital markets as well taking in deposits and making loans in the manner described in most banking primers. What differentiates banks from other financial firms is that they are in the business of selling liquidity via credit lines. In order to credibly offer that service, the banks themselves have to been seen as being unquestionably liquid.